Originally published at The Boock Report
The weakness in global stock markets that started in Asia overnight is for obvious reasons. People are losing some patience with "It's just a negotiating tactic" reason for the tariffs because instead of leading to a formal negotiation, it is leading to an escalation. I'll use this quick comment as a segue into foreign holdings of US Treasuries.
For the 2nd straight month in April, foreigners were net sellers of notes and bonds. The total was .8b, about the same as the net sales in March. The complexion of the activity was very bifurcated however as central banks sold a total of .3b, more than offsetting private foreign buying of .6b (International agencies make up the difference).
Most notable was the behavior of the Russians. They basically sold half of their US Treasury holdings, liquidating .4b worth in April alone, leaving holdings at .7b. It was April 6th that the US government put sanctions on some very well known Russian oligarchs and others and it upset the Russian government enough for them to sell a large chunk of their US Treasury bonds.
China was a net seller as was Japan. Japan now holds the least amount of US Treasuries since 2011. Hedge funds were the biggest buyer as the 'Cayman Islands' category saw a net increase of buying of .2b.
Bottom line, ever since 2013 foreigners have been net sellers of US Treasuries on the order of b after buying more than 0b in each of 2011 and 2012. For the market, it really didn't matter because the Fed was a voracious buyer via its QE programs. Now, of course, that is in reverse at the same time foreigners are still shunning our paper. What is left is mostly domestic demand for US Treasuries, via pension funds, insurance companies, and other funds. QT started in Q4 and the pace of foreign selling picked up the pace in October. Since then the 10 yr yield is up by 60 bps while inflation expectations are up by 30 bps.
Start watching this data, even though it is somewhat dated when reported. We need all the help we can get in the search for buyers of US Treasuries due to the enormous supply coming our way in the next few years. Our stance on trade with our trading partners could very well play into this in coming months and quarters, especially with China, the largest owner of US Treasuries.
In light of what is now a back and forth of trade taxes, the global trade data should also be at the top of the list of things to look at. At least in May, the Japanese trade figures were better than expected. Exports were higher by 8.1% y/o/y, a bit better than the estimate of up 7.5% and helped in part to the recent yen weakness. Imports jumped by 14%, well more than the forecast of up 8%. Much of that, however, is higher energy costs which Japan mostly imports. The yen is modestly higher and the Nikkei fell back into the red year to date with a .75% decline.
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